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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
Litigation Release No. 15129 \ October 21, 1996
Accounting and Auditing Enforcement
Release No. 845 / October 21, 1996
Securities and Exchange Commission v. Don Haywood Pace
(Civ. No. 96-2416) (USDC/DC)
On October 21, 1996, the Securities and Exchange Commission
filed a civil lawsuit against Don Haywood Pace in the United
States District Court for the District of Columbia alleging
violations of the antifraud, proxy, books and records and
beneficial ownership provisions of the federal securities laws.
The Commission is seeking an injunction from future violations, a
bar from serving as an officer or director of a publicly-held
company, disgorgement of ill-gotten gains and civil penalties.
Don Pace is former chief executive officer and director of Pace
American Group, Inc., a holding company that wrote surety bonds
and insurance products through wholly-owned subsidiaries. Don
Pace co-founded Pace American in 1988 and helped to take it
public in 1992 through an offering of common stock which raised
over $18 million.
The Commission s complaint alleges that Don Pace committed
antifraud violations by failing to disclose in Pace American s
annual reports, proxy materials and registration statements filed
with the Commission that he received over $480,000 in related
party transactions. The transactions allegedly involved his
undisclosed receipt between 1990 and 1994 of over $450,000 in
commission payments made by Pace American to Commercial Surety
Bond Agency, a Pace American surety bond agency owned by Ralph
Eidem, and of a portion of payments which Pace American surety
bond holders made to shell corporations which he helped to
establish and had an undisclosed interest.
The Commission s complaint also asserts that Don Pace
committed financial fraud by causing Pace American to issue
consolidated financial statements which failed to disclose that
he caused Pace American to convert an equity interest made by
certain investors into a debt which Don Pace obligated Pace
American to repay. Don Pace also caused Pace American to
understate the company's loss reserves on surety bonds
outstanding at year-end 1992.
The Commission also alleges that Don Pace misled Pace
American's auditor in connection with its audit of and issuance
of reports on the company s financial statements for its fiscal
years ended December 31, 1989 through 1992, by providing to the
auditor financial statements which falsely recorded a total of
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$443,375 of interest expenses on the debt to certain investors as
reinsurance expenses and failed to include a significant
liability for the conversion of equity to debt. The complaint
alleges that Don Pace also misled the auditor by providing to it
a management representation letter in connection with the 1992
audit which stated that unpaid losses on the company's insurance
portfolio were adequate when he had serious concerns at the time
whether the company's loss reserves on surety bonds written in
1992 should have been significantly increased. The Commission
also alleges that Don Pace caused Pace American to maintain false
books and records because he failed to have the company s books
and records reflect the existence of Pace American brokerage
accounts he exercised control over in Mexico as well as his
misappropriation from those accounts of $42,589 in corporate
assets stemming from bond proceeds.
The complaint further asserts that after his dismissal from
Pace American, Don Pace filed with the SEC a Schedule 13D
concerning his beneficial ownership of common stock which
fraudulently disclosed that he had no plans or proposals to have
the company effect a change in management or an extraordinary
corporate transaction. The complaint alleges that before and
after Don Pace filed the Schedule 13D he had plans and proposals
to replace the company s board of directors and have the company
consider merging a Mexican company which wrote surety bonds into
Pace American.
As a result of the foregoing, the Commission alleges in its
Complaint filed today that Don Pace violated Section 17(a) of the
Securities Act of 1933 and Sections 10(b), 13(b)(5), 13(d) and
14(a) of the Securities Exchange Act of 1934 and Rules 10b-5,
12b-20, 13b2-1, 13b2-2, 13d-1, 13d-2 and 14a-9 thereunder.